Business focus: analysts are not betting many chips on US behemoth

By Bob Cervi

Published Monday, November 10, 2014

IBM struggles to convince with its strategy for the Internet age, while Rolls-Royce is hit by the fallout from Russian sanctions.

News that IBM has finally managed to sell off its American chip-making business gave a fillip to its investors - even though the technology behemoth not only gave away the loss-making unit but also added a $1.5bn sweetener to the buyer, Global Foundries, the Abu Dhabi-owned chip manufacturer.

It was the latest move in IBM's attempts to refocus itself on more profitable activities, as part of its strategy to shift from being primarily a provider of servers and software to becoming a cloud-computing supplier. According to analysts, around two-thirds of the company's revenues come from 'old technologies' - which these days seems to refer to anything that is not cloud-based.

The beauty of the cloud, of course, is that it offers more solid long-term revenue prospects: business clients are usually tied into annual subscriptions for remote services, instead of paying out large upfront charges for licences for on-site installations. The former approach is proving to be of benefit to software specialists such as Germany-based SAP, which is moving away from the licensing of its products toward providing its services in the cloud.

However, the downside for companies pursuing this strategy is that subscriptions offer returns over the long-term. Hence, in its latest annual financial forecasts, SAP has reduced slightly its expectations for profit growth this year. In 2013 it made $5.5bn of profit, which it now expects to rise to somewhere between $5.6bn and $5.8bn in 2014, lower than previously predicted.

IBM's latest quarterly revenue results, which saw a 4 per cent fall to $12bn, was the company's ninth consecutive quarterly drop in revenues. Profits plunged 17 per cent to $3.5bn in the same third quarter, compared to the previous year.

Some analysts believe that IBM's plan to restructure itself into a big data analytics provider still has a long way to go, and they seem unconvinced by the company's push into artificial intelligence. IBM is aiming to turn its Watson supercomputer to practical use for businesses. It has launched Watson Analytics as a decision-making support tool. But this has yet to prove itself in revenue and profit terms.

According to the analyst FBR Capital Markets: "IBM needs to find success and growth in the cloud through organic and acquisitive means... otherwise there could be some darker days ahead for the tech giant."

Meanwhile, UK chip designer Arm Holdings was sounding optimistic about its ability to diversify its activities. Although its components are famously present in more than 90 per cent of smartphones globally, this consumer market is subject to swings in demand. And so Arm is turning to the Internet of Things by developing interoperability software to enable devices to communicate more easily.